Effects of oil price slump spread through securitization markets

Lower gas and oil price is at the same time positively affecting other areas of the market as a much broader set of consumer and corporate obligors benefit from lower fuel and energy costs.

Negative effects from the slump in oil prices are emerging in pockets of the US structured finance market, weakening collateral performance or eroding the credit quality of transactions, Moody’s IS says in a just-published report. Lower oil and gas prices are, however, at the same time positively affecting other areas of the market, as a much broader set of consumer and corporate obligors benefit from lower fuel and energy costs.

“The drop in oil and gas prices has so far negatively affected only a fairly narrow set of securitizations in a meaningful way,” says Moody’s analyst, Jody Shenn. “Nevertheless, we expect credit challenges created by the slump to continue as the energy industry’s woes and their knock-on effects persist.”

Certain collateralized loan obligations (CLOs) and asset-backed securities (ABS) with direct exposure to energy companies have felt some of the worst effects of low energy prices, Shenn says in “Oil Price Drop Rippled Through Securitization Markets But Effects Are Limited.” And the decline in the credit quality of these companies has been both broad and severe: Moody’s downgraded its ratings on 103 of energy company issuers globally between December and late March.

Conversely, low energy costs are bolstering the performances of many other structured finance transactions. Lower fuel costs for consumers not affected by job cuts at energy companies, for instance, have improved their ability to service debt such as mortgages and car loans.

The impact on US auto loans has been mixed and mild, Moody’s new report says. In some energy-focused states, such as North Dakota and Wyoming, the performance of US auto loans is declining, while in others, such as Texas, performance has actually improved. And though oil-related tanker cars can represent up to 10% of the assets in US railcar lease ABS transactions, there has as yet been no meaningful impact from potentially lower revenues from the assets.

Outside the US, credit quality deterioration due to low oil prices has so far been limited to Russian securitizations, Moody’s says. Elsewhere, risks from exposure to the energy industry have been deal-specific.

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